What is a Special Needs Trust?

A Special Needs Trust (SNT) is a tool used to provide financial support to an individual with a disability. The goal of the SNT is to preserve eligibility for needs-based government benefits, including Medical Assistance (MA) and Supplemental Security Income (SSI), while providing the beneficiary with the resources to supplement such government benefits. If the SNT has the proper provisions, the assets within the trust may be excludable from the assets of the beneficiary for the purpose of determining eligibility for MA and SSI.

As the purpose of the trust is to supplement the benefits provided by MA and SSI, and not replace them, distributions should be for support beyond the basic needs covered by these programs. If distributions are for expenses of basic needs, government benefits may be reduced accordingly. A few examples of expenses that exceed the basic needs covered by MA and SSI include excess medical and dental expenses, medical equipment, education and training, and special dietary needs.

There are different types of SNTs, each with their own rules and requirements – below is a brief overview of common types of trusts.

Self-Settled Trusts

A Self-Settled Trust, also referred to as a First Party SNT, is an irrevocable trust funded with assets or income that belong to the individual with a disability. The beneficiary of this type of SNT must be classified as disabled by the Social Security Administration and must be under the age of sixty-five when the trust is established. This type of SNT must also include payback provisions to the Department of Health Services (DHS), when the trust terminates, for an amount equal to the MA received by the beneficiary during their lifetime.

Supplemental Needs Trusts

Supplemental Needs Trusts, also referred to as Third Party Trusts, are funded with resources from someone other than the beneficiary. Similar to a Self-Settled Trust, the assets in the trust may be excludable from the beneficiary’s resources when qualifying for needs-based government benefits, but unlike the Self-Settled Trust, Supplemental Needs Trusts often do not require Medical Assistance payback provisions. The contingent beneficiary of a Supplemental Needs Trust can be anyone, including beneficiaries without a disability.

Pooled Trusts

Pooled Trusts are often used if the cost associated with either of the trusts previously mentioned is not feasible given the resources available. A Pooled Trust is typically managed by a non-profit organization, which combines the resources of many beneficiaries into a single trust, often reducing administrative expenses. Each beneficiary will have their own sub-account that can be used for their benefit and shares in the investment performance of the trust. Sub-accounts can be funded by the beneficiary’s own resources (first party) or by the resources of someone other than the beneficiary (third party). Assets remaining in the beneficiary’s subaccount upon their death are typically retained by the trust or used to payback DHS for the medical assistance received by the beneficiary throughout their lifetime.

Each of these types of trusts can provide a unique benefit and your financial advisor can help you determine which is most appropriate for your situation.

Waldron Private Wealth (“Company”) is an SEC registered investment adviser with its principal place of business in the Commonwealth of Pennsylvania. Company may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. For information about the Firm’s registration status and business operations, please consult Waldron’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov.

This material is for informational purposes only and is not intended to be an offer, recommendation or solicitation to purchase or sell any security or product or to employ a specific investment strategy. Due to various factors, including changing market conditions, aforementioned information may no longer be reflective of current position(s) and/or recommendation(s). Moreover, no client or prospective client should assume that any such discussion serves as the receipt of, or a substitute for, personalized advice from Company, or from any other investment professional. Investing involves risk, including the potential loss of money invested. Past performance does not guarantee future results. Asset allocation and diversification do not guarantee a profit or protect against loss. Company is neither an attorney nor an accountant, and no portion of the web site content should be interpreted as legal, accounting or tax advice. 

Disclaimer

Providing financial support for our loved ones when we are no longer here is a difficult subject to discuss and requires us to not only look at how much support is necessary, but also how we want to provide this support. One solution is to purchase a life insurance policy that provides our heirs with assets upon our death.

The first step in purchasing life insurance is to determine how much life insurance we need. We discussed some of the important factors in arriving at this dollar amount in our previous article Considerations for a Life Insurance Needs Analysis.  The next step after determining how much life insurance we need is to purchase a policy with features consistent with our goals.

There are four main types of life insurance policies to consider during your life insurance analysis; however, there are also several options within each policy that can customize the policy to your needs. These options include who is covered by the policy, how long premiums must be paid and what additional benefits may be available within the policy. Since the need for these additional features will vary based on the individual, we are going to look at each type of policy at a high-level.

Term Insurance

Term policies offer coverage for a specified period, usually 10, 20 or 30 years, though additional coverage terms are available. As with any life insurance policy, term insurance guarantees a payout of the death benefit if you die within the specified term. If you outlive the term of the policy, the policy expires without ever paying out.

Term policies typically have lower premiums than permanent policies due to coverage only lasting for a specified period. While there are a handful of reasons why a term policy may be right for you, the most popular reason is to provide the liquidity to pay off a large debt or expense in the event of your death.

Whole Life

Whole life policies are a form of permanent life insurance, meaning coverage will last the entirety of your life, as long as premium requirements are met. Whole life policies offer a specified death benefit as well as a cash value. When you pay your premiums on a whole life policy, a portion of the premium goes towards the cash value and will grow tax-deferred at a guaranteed rate. The cash value can serve as an addition to the death benefit or can be accessed during the life of the insured for other purposes.

Whole life policies are typically used to provide liquidity for your beneficiaries, regardless of the timing of your death. They also provide another opportunity to build tax-deferred wealth to supplement retirement income and/or leave a legacy for your heirs.

Universal Life

Universal life policies are like whole life policies in that they are a form of permanent insurance and carry a cash value. These policies are used for similar reasons, but a universal life policy offers more flexibility on when premiums are paid and how the cash value accumulates.

While whole life policies have a fixed premium, universal life policy premiums may increase over time to account for the aging and insurability of the insured. While whole life policies offer a guaranteed interest rate on the cash value, the interest rate on universal life policies are based on current market conditions – usually subject to a guaranteed minimum. Universal life policies can also use the cash value to pay premiums, reducing the risk of the policy lapsing due to missed premiums.

Variable Universal Life

Variable universal life is another form of permanent life insurance that has similar uses to whole and universal life policies. Like universal life insurance, the premiums in the variable universal life policy are flexible, may increase over time and may be paid using the cash value of the policy.

The biggest differentiator when it comes to variable universal life policies is that the cash value can be invested in a variety of subaccounts. These subaccounts function in a similar manner to mutual funds, allowing you to invest in different areas of the market. The flexibility offered by the investment options within this policy provides for more growth potential in the cash value, however this growth potential does come with the additional risk associated with investing. These policies are typically the most expensive due to the additional fees associated with subaccounts.

Irrevocable Life Insurance Trusts

An irrevocable life insurance trust (ILIT) is a form of irrevocable trust that not only works to remove the policy from the insured’s estate, but also to manage the distribution of policy proceeds upon the insured’s death.

When you are both the owner and insured on a life insurance policy, the death benefit and cash value will be included in your estate. To remove the policy from your estate, you can transfer it to an ILIT, making the trust the owner and beneficiary of the policy. If you don’t currently own a policy but would like to take advantage of the benefits of an ILIT, you can establish the ILIT and then have the ILIT purchase the policy on your life. The ILIT can work to reduce your estate tax liability by not only removing the policy from the estate but can also provide a way for you to gradually reduce your estate over time. This can be done by gifting the cash from your estate to your ILIT utilizing annual exclusion gifting and Crummey powers of withdraw.  Once the cash is gifted to the ILIT, the ILIT can use it to pay the premiums on the policy to keep it in force.

Aside from reducing the size of your estate, ILITs can allow you to specify how the death benefit should be paid out and under what circumstances the beneficiaries may access their share of the proceeds. Not only does this feature allow the trustee to teach your beneficiaries to use this inheritance responsibly but can potentially allow you to build a legacy for further generations.

Conclusion

Life insurance and irrevocable life insurance trusts are great tools that can serve many purposes in your financial plan. It is important to understand the intricacies of each option before deciding which is best for you. A Financial Advisor can help you understand these details and determine which strategies you can benefit from.

For more information on unique ways life insurance may be used, listen to our podcast episode here.

Waldron Private Wealth (“Company”) is an SEC registered investment adviser with its principal place of business in the Commonwealth of Pennsylvania. Company may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. For information about the Firm’s registration status and business operations, please consult Waldron’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov.

This material is for informational purposes only and is not intended to be an offer, recommendation or solicitation to purchase or sell any security or product or to employ a specific investment strategy. Due to various factors, including changing market conditions, aforementioned information may no longer be reflective of current position(s) and/or recommendation(s). Moreover, no client or prospective client should assume that any such discussion serves as the receipt of, or a substitute for, personalized advice from Company, or from any other investment professional. Investing involves risk, including the potential loss of money invested. Past performance does not guarantee future results. Asset allocation and diversification do not guarantee a profit or protect against loss. Company is neither an attorney nor an accountant, and no portion of the web site content should be interpreted as legal, accounting or tax advice. 

Disclaimer

One of the most important aspects of a well-rounded financial plan is addressing the need for Life Insurance. This also happens to be one of the most emotionally difficult subjects to discuss. While planning for the possibility of your premature death can be unpleasant and upsetting, it is important to consider how your loved ones will be impacted when you’re gone.

While we won’t be here to support our loved ones when they grieve our loss, we can attempt to provide them with the financial support they need. Not only can life insurance provide a way to temporarily replace your income, but it can assist your beneficiaries in paying off your debts as well as any medical or final expenses you leave behind.

After identifying who you want to provide for, there are several factors to consider when determining how much life insurance you need. One technique for determining this amount is by utilizing the acronym DIME – Debts, Income replacement, Mortgage, Education, and other essentials. We are going to explore each of these pieces in greater detail below.

Debts

The first factor to consider is what debts you will leave behind and how you would like them to be paid. This category does not include your mortgage, but may include debts such as credit card balances, medical bills, personal loans, and other lines of credit.

Generally, assets left in your estate at your death will be used to pay off your debts. This reduction in assets may reduce the inheritance your heirs receive. If there are co-signers or joint owners on your debt, they will likely be responsible to pay any remaining debt after the offset from your estate. In community property states, your spouse will be responsible for paying off your debts.

Income Replacement

Your family may feel a large financial strain if your death occurs while you are still working and providing them with financial support. One way to reduce this burden is to purchase life insurance with a death benefit equal to the amount of income you would have received if you lived for a specified period. For example, you may want to provide your spouse with a lump sum of money equal to a few years of your salary to allow them time to grieve and adjust to being the primary provider of financial support for your family.

Mortgage

Another aspect to consider if you have an outstanding mortgage on your home is whether you want to provide your heirs with the means to pay the balance so they can keep the home. With a reduction in income it may become more difficult for your family to make the mortgage payments and stay in the home. Term insurance is a great solution for providing for expenses that end after a specified period.

Education and other Essentials

After considering your debts, mortgage and replacing your income, you can plan to provide for large upcoming expenses. One substantial expense you may want to help provide for, even after you’re gone, is a post-secondary education for your children. Even if you have been saving for your child’s education, there will likely be a gap if you are no longer here to fund that savings. Life insurance is a great way to fill any gaps in tuition expenses your children may have in your absence.

Waldron Private Wealth (“Company”) is an SEC registered investment adviser with its principal place of business in the Commonwealth of Pennsylvania. Company may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. For information about the Firm’s registration status and business operations, please consult Waldron’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov.

This material is for informational purposes only and is not intended to be an offer, recommendation or solicitation to purchase or sell any security or product or to employ a specific investment strategy. Due to various factors, including changing market conditions, aforementioned information may no longer be reflective of current position(s) and/or recommendation(s). Moreover, no client or prospective client should assume that any such discussion serves as the receipt of, or a substitute for, personalized advice from Company, or from any other investment professional. Investing involves risk, including the potential loss of money invested. Past performance does not guarantee future results. Asset allocation and diversification do not guarantee a profit or protect against loss. Company is neither an attorney nor an accountant, and no portion of the web site content should be interpreted as legal, accounting or tax advice. 

Disclaimer

Financial well-being is a broad topic with a multitude of moving parts. When starting the journey to understand and simplify an individual’s financial picture, there are a few pieces that should not be overlooked.

EMERGENCY FUNDS

Establishing and maintaining an emergency fund is one of the most important things an individual, or family, can do. Having an emergency fund can allow for an improved ability to withstand unexpected events and overall uncertainty. Monthly expenses, family dynamic, and employment prospects are a few of the factors that should be taken into consideration when developing an emergency fund. An ideal emergency fund has between three- and six-months’ worth of expenses, but the exact amount will vary depending on the person and their situation. A great starting point for determining the size of an emergency fund is developing a budget.

ESTABLISHING A BUDGET

A budget is an important tool for keeping track of expenses and identifying areas where an individual may be overspending. By identifying these areas, resources can be re-allocated to savings, investments and other expenses that may be more beneficial. When developing a budget, traditional expenses such as mortgage/rent payments, utilities, vehicle payments, insurance payments, and groceries are not the only items that should be considered. Money spent on hobbies, interests, entertainment, and savings towards goals are some of the other expenses that should be accounted for. A budget can also be used to determine whether a large purchase, like a vehicle or a home, can be taken on comfortably.

CONTROLLING HOUSING COSTS

There are a variety of factors that need to be considered when determining whether it is time to buy a home, and what an individual can afford. The household budget will be one of the first things to look at and will help determine what can be saved towards a down payment each month, as well as the mortgage payment an individual or family can afford. Knowing the monthly mortgage payment that can be taken on comfortably can help determine the price of the home that can be purchased. Depending on the type of loan taken for the purchase of the home, a down payment between 5- and 25% of the purchase price may be required.

IMPORTANCE OF BASIC ESTATE DOCUMENTS

Estate planning can feel overwhelming, but that should not deter someone from understanding it’s importance. Basic estate documents are essential to communicating and honoring an individual’s wishes in the event they are no longer able to make decisions for themselves or are no longer living.

DURABLE POWER OF ATTORNEY (POA)

A Durable Power of Attorney designates an agent to act on behalf of an individual if they are incapable of making decisions for themselves due to either disability or mental incapacity. The durable POA will specify the powers that the agent has and what types of decisions they can make on behalf of the incapacitated individual. The document will also specify the extent to which the agent may act as the individual.

MEDICAL POWER OF ATTORNEY AND LIVING WILL/ADVANCE DIRECTIVES

Health Care wishes can vary greatly depending on the person. For this reason, it is important to put thought into the care that an individual deems acceptable to receive. Regardless of an individual’s age, it is important that these wishes are outlined before they are needed, as these directions are to be used if the individual has a medical crisis and is not able to make decisions for themselves. A Living Will specifically outlines the treatment an individual consents to or prohibits, and the medical power of attorney designates someone to make decisions on behalf of the incapacitated individual.

LAST WILL & TESTAMENT

The Last Will & Testament provides direction for how property should be distributed upon an individual’s death and if the individual has minor children, it can designate a legal guardian for the children. Providing this direction on how property should be distributed can remove confusion and disagreements for the surviving loved ones. An important point to remember is that if an individual dies without naming a guardian for their children, the courts will choose a guardian. In most cases, a family member, or multiple family members, will volunteer to be the guardian. Choosing a guardian and communicating that decision with them can allow for a less stressful and confusing transition for both the guardian and the children. It is important to remember that this is just an overview of a few important estate documents and should not be considered legal advice. Due to the importance of the accuracy of such documents, we recommend you work with an attorney when drafting estate documents.

DID YOU KNOW?

• Women control two-thirds of consumer spending¹
• Women hold 40% of total global wealth¹
• Women account for 40% of entrepreneurs world-wide¹
• 20% of First-time home buyers in 2021 were single women²

¹ Ron Shevlin. “The Four Things Women Want from Financial Services.” Forbes. June 1, 2020.

https://www.forbes.com/sites/ronshevlin/2020/06/01/the-four-things-women-want-from-financial-services/?sh=10dbae9971d2

²National Association of REALTORS®. “Women Home Buyers.” National Association of REALTORS® Profile of Home Buyers & Sellers. 2021.

https://www.nar.realtor/women-home-buyers#:~:text=Along%20with%20the%20increase%20in,70.6%20percent%20to%2067.1%20percent

In our second podcast episode, our Ali Swart, CFP® and Samantha Spitzer, CFP®, CDFA® give their own opinions on foundational financial well-being concepts. Click here to listen.

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